The Banking Sector
The Banking Act
The Financial Business Act
The Deposit and Investor Guarantee Fund
The Danish banking system is governed by a number of specific legislative acts, each dealing with specific banking or finance areas and serving as an implementation of EU directives in Danish law.
The Danish banking sector is characterized by a relatively high rate of concentration. Even though at the end of 2001 Denmark had around 187 commercial and savings banks, three major banks had a combined balance sheet representing approximately 73% of the total of all such banks.
The Danish Central Bank is the domestic monetary policy authority. It is an independent institution under the Central Banking Act and is responsible for maintaining a safe monetary system, as well as facilitating and controlling monetary flows and credit. The Central Bank meets the requirements of the Maastricht Treaty with regard to independence (EU central banks must be independent in taking monetary policy measures).
The Danish Financial Supervisory Authority oversees the domestic financial services sector. The authority is a single regulator, which means that it is responsible for supervising the following:
- insurance companies;
- pensions funds;
- mortgage banks;
- unit trusts;
- securities firms;
- a range of special credit institutions; and
- banks (including savings and cooperative banks).
The authority regulates foreign branches of Danish banks. It has the status of a directorate under the Ministry of Economic Affairs, which has overall responsibility for legislative acts.
The Commercial Banks and Savings Banks Consolidated Act 787 of September 4 2001 was passed in 1974 and has been amended several times, primarily as a result of the need for implementation of EU banking directives. In relation to the single market, the Banking Act is based on the EU principles of home country control and mutual recognition of the supervisory legislation of the member states of the European Union.
The Banking Act applies to commercial and savings banks and credit cooperatives, collectively referred to as 'credit institutions'.
The act states that the business of credit institutions comprises 'credit institutions activities', which are defined as "the performance of functions relating to transactions of money, credit instruments and securities, and services associated herewith".
The act states a few exemptions from the activity rule in stating that credit institutions may:
- engage temporarily in other activities in order to fulfil prior commitments or contribute to the reorganization of commercial undertakings;
- engage in other non-core credit institution activities, subject to the Financial Supervisory Authority's decision as to whether they will be performed by a separate company;
- carry out insurance business and mortgage credit activities through subsidiaries; and
- engage in other activities in association with other undertakings, provided that (i) they have no direct or indirect controlling interest in the undertaking, (ii) they do not engage in such activities with other companies of the same group, and (ii) the activities are carried out in different companies to the credit institutions.
The Financial Supervisory Authority must be informed of the engagement in non-core credit institution activities.
The Banking Act states that credit institutions have a number of exclusive rights when complying with it, including the right to (i) approach the public with the purpose of offering themselves as recipients of deposits (together with state and foreign credit institutions), and (ii) employ a commercial or savings bank, or credit cooperative, in their company name. The latter is an obligation as well as a right under the act, despite the fact that a foreign credit institution is entitled to employ the name that it uses in its country of residence.
According to the capital requirements listed in the Banking Act, the share capital of a commercial bank must comprise at least €50,000, and the share capital must be fully subscribed and paid up. Subsequent capital increases must be fully subscribed and paid up before registration. Goodwill cannot constitute a part of the paid-up capital. The share capital may not be divided into classes with different voting rights.
For savings banks and credit cooperatives, the paid-up guarantee/cooperative capital must comprise at least €50,000 and the number of guarantors/members must be at least 50, each of whom must pay at least around €134.
The Banking Act contains specific solvency requirements. At all times, the capital base plus the short-term supplementary capital must constitute at least 8% of the credit institution's risk-weight assets, including accounts, which constitute a market risk. The Financial Supervisory Authority has issued detailed rules concerning the calculation of the solvency ratio.
The Banking Act states that credit institutions must obtain authorization from the Financial Supervisory Authority in order to carry out credit institution activities. The application for this authorization must specify the nature of the business plan and the credit institution's organizational structure. Furthermore, detailed information must be provided about individuals with direct or indirect ownership of at least 10% of the capital or voting rights or a holding, enabling them to exercise considerable influence on the business of the credit institution.
The provisions laid down in the Danish Companies Act relating to company application and registration also apply to credit institutions.
The Financial Supervisory Authority may recommend to the minister of economic affairs that an authorization be refused. Refusal can be based on a number of criteria, relating to, for example, the members of the management board of the credit institution, its directors or major capital owners, or close links between the credit institution and other undertakings.
The safe operation of the credit institution and the effective exercise of the Financial Supervisory Authority's functions are the main priorities when considering authorizations. Accordingly, the Financial Supervisory Authority may refuse authorization if a credit institution has concluded a corporation agreement with an undertaking governed by legislation in a country outside the European Union, and such links are deemed to render it difficult for the authority to exercise its functions.
The reasons for refusal of an authorization must be communicated to the applicant in writing within six months of submission of the application.
Branches of foreign credit institutions may conduct credit institution activities in Denmark if they are granted authorization in another country in the European Union, or in countries with which the European Union has concluded a corporation agreement. The supervisory authorities in the home member state must inform the Danish Financial Supervisory Authority of the foreign bank's intention to perform such duties in advance. These conditions also apply to cross-border credit institution activities.
If a foreign credit institution wishes to set up a representation office, the Financial Supervisory Authority must be notified in advance.
Part 10 of the Banking Act lists the circumstances in which the Financial Supervisory Authority can withdraw an authorization and commence the winding-up of a credit institution. For example, the withdrawal of an authorization can be made when:
- credit business does not commence within 12 months of authorization being granted;
- credit business is not carried out for a period of more than six months;
- the credit institution grossly or repeatedly violates the provisions of the Banking Act, the Danish Financial Business Act or regulations pursuant to these acts;
- the credit institution becomes insolvent; or
- the capital base of a credit institution fails to meet the necessary capital requirements, or falls below the required levels and does not recover within the timeframe set by the Financial Supervisory Authority.
The authority may file for suspension of payments for a credit institution if this is deemed to be in the interest of the depositors.
Where a credit institution's authorization is withdrawn, the act states that the credit institution must be wound up.
The Financial Business Act 501 of June 7 2001 applies to financial undertakings, including financial holding companies to the extent mentioned. It also applies to branches of financial undertakings domiciled in countries outside the European Union and countries with which the European Union has entered an agreement.
The act does not apply to mutual non-life insurance companies (which are exempt from supervision in accordance with the Insurance Business Act), lateral pension funds and mutual insurance companies.
The act regulates a number of issues relating to the safe conduct of financial business across the board, notwithstanding the type of financial business undertaken by the individual institution, including:
- honest business principles and disclosure of information;
- ownership;
- management positions and duties;
- special regulations for insurance companies;
- group regulations including separation, disposal and intra-group transactions;
- consolidation; and
- financial audit requirements.
The act gives guidelines as to the way in which a financial business must be conducted, including:
- the manner in which confidential information must be treated;
- the administrative procedures that must be in place in order for the conduct of the business to be safeguarded;
- requirements with regard to the board of directors and the qualifications of the individual board members;
- the procedures in place to safeguard inter-group relations in such a way that the requirements concerning individual members of a financial group are not violated by the group or individual companies within it; and
- the requirements regarding audits.
The act was passed in June 2001 as the Financial Supervisory Authority's response to developments in the Danish financial market, where mergers had led to the establishment of larger financial groupings with group companies undertaking different types of financial businesses on a coordinated group basis.
The Deposit and Investor Guarantee Fund
The Guarantee Fund for Depositors and Investors Act 415 of April 26 1998 covers depositors and investors against losses that arise in connection with the suspension of payments and compulsory liquidation of commercial, savings, cooperative and mortgage banks, and investment managers.
The fund's capital is secured by payments and guarantees provided by authorized credit institutions in Denmark; it is compulsory for them to join the fund. Other EU credit institutions with branches in Denmark may join the fund in order to benefit from cover in addition to that provided by their home member state's legislation. The fund's capital must be at least €430 million.
Deposits covered by the fund are limited to approximately €40,000 per depositor after deducting any loans raised by the depositor and other commitments to the bank. However, pension savings, for example, are covered in full, with no restrictions as to the amount.
The fund covers losses sustained by an investor when a credit institution cannot return its securities. Losses are covered up to a maximum value of approximately €20,000 per investor after deducting any loans or other commitments of the investor to the credit institution.
For further information on this topic please contact Anders M Hansen at Osborne Clarke by telephone (+45 33 12 95 12) or by fax (+45 33 12 95 15) or by email ([email protected]).